As discussed in the chapter, abnormal earnings (AE) are AE t = X t (r e × BV t1
ID: 2820963 • Letter: A
Question
As discussed in the chapter, abnormal earnings (AE) are
AEt = Xt (re × BVt1)
where Xtis the firm’s net income, re is the cost of equity capital, and BVt-1 is the book value of equity at t 1.
Following are Xt, BVt-1, and re for two firms.
Required:
Calculate each firm’s AEt each year from 2013 to 2017. (Round your final answers to the nearest whole dollar. Negative abnormal earnings should be indicated with a minus sign.)
Which firm was better managed over the 2013–2017 period?
Which firm is likely to be the better stock investment in 2018 and beyond?
Company A 2013 2014 2015 2016 2017 Xt $ 66,920 $ 79,632 $ 83,314 $ 89,920 $ 92,690 BVt1 478,000 504,000 541,000 562,000 598,000 re 0.152 0.167 0.159 0.172 0.166Explanation / Answer
Company B was better managed from 2013-2017.
Company B is likely to be a better stock investment in 2018 and beyond.
Company A 2013 2014 2015 2016 2017 Xt $ 66920 $ 79632 $ 83314 $ 89920 $ 92690 BVt-1 478000 504000 541000 562000 598000 re 0.152 0.167 0.159 0.172 0.166 AEt -5736 -4536 -2705 -6744 -6578 Company B 2013 2014 2015 2016 2017 Xt $ 192940 $ 176341 $ 227700 $ 198900 $ 282964 BVt-1 877000 943000 989999 1020000 1199000 re 0.188 0.179 0.183 0.175 0.186 Aet 28064 7544 46530 20400 59950Related Questions
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